SEC vs Ripple: The Crypto Currency Lawsuit of the Century

January 3,2021 in BLOGS | No Comments

A few hours before Jay Clayton, Chairman of the Security and Exchange Commission (SEC), exited the building on December 23 upon completing his tenancy, SEC listed a lawsuit against Ripple Labs Inc. SEC testified that it generated more than $1.3 billion through sales and disseminating digital assets of the XRP without notifying.

Ripple, established in San Francisco in 2012, runs the RippleNet and the XRP reimbursement protocols, known as preferable to bitcoin with its enhanced records, quicker settlement pace, and digital wallet for foreign transactions beyond 55 countries. Ripple is one of the industry’s giants for the new crypto industry in the United States, creating real-economy products from innovative technologies.

Ripple’s blockchain-like trade network claims to be a systematic, general, and low-cost complement compared to usual payment networks such as Society for Worldwide Interbank Financial Telecommunication (SWIFT) and others, and more.

The SEC suit does not claim deception but inquires about undefined losses. It aims to prevent Ripple’s administration from engaging in the business of the digital asset market. The lawsuit challenged one of the beneficial characteristics of Clayton’s 2017; statement on Cryptocurrencies and Initial Coin Offerings. It was to be kept in mind that these “disruptive, transformative and efficiency-enhancing” advancements could “facilitate capital formation and provide promising investment opportunities for institutional and Main Street investors alike.”

Furthermore, the lawsuit assures Clayton’s declaration in which he declared the highest SEC authority to manage all digital assets possible, despite its composition, purpose, and use. After the lawsuit, the prices for XRP bolstered by 25 percent even when some business operations did not function.

Ripple launched a dynamic reply, describing the lawsuit as an offensive initiative on the rising cryptocurrency business. The trial has some intriguing resemblances to telecommunications, in which managers apply outdated regulations to govern novel technologies, underestimating the competition in the United States for creativity.

Clayton’s last strategy was his most bold move towards the technological industry he worked for four years in, trying to control by authority alleged from a 1934 ordinance. Concerning possible assumptions, the lawsuit is becoming the crypto trial of the century.

Some of the chief complications are listed below:

Currency or Security?

A fundamental question that arises is if XRP is a security or a currency. A currency refers to as a means for trade and reserve of value, such as dollars, gold, or frequent flier miles. While, security comprises of the monetary investment agreement, generally negotiable like a stock or bond. All of this is important as various legislations and ordinances apply. In the year 2015, the US Departments of Justice and Treasury settled, as a component of an agreement with the FinCEN (Financial Crimes Enforcement Network); XRP is indeed a currency. Certainly, Ripple has followed the guidelines maintained for digital currencies with distinct companies for 5 years, including currency compliance and operating beyond several countries. Ripple perceives the XRP ledger as a localized unrestricted-resource, functioning through the consent of a developing society of consumers and initiators creating original commodities through XRP. XRP is not an investment agreement in their firm, and it is something that they cannot regulate. If investors wish to invest in Ripple, they need to acquire shares in the firm instead of purchasing XRP.

This resolution did not deter the SEC from declaring that Ripple’s methods with XRP sum to  investment contracts under the Howey test and thus need exposures as “securities.” The SEC filed similar lawsuits challenging other cryptocurrencies like Grams from Telegram and Kik Interactive tokens. It induced stress as a result of the cryptocurrency world as America’s eight monetary regulators fight for supremacy in financial technology.

If investors want to finance in Ripple, they will acquire shares in the company itself, not XRP.

This decision did not deter the SEC from challenging Ripple’s methods with XRP equaling to  investment contracts under the Howey test and thus needs disclosures as “securities.” The SEC has filed alike lawsuits against other cryptocurrencies like Grams from Telegram and Kik Interactive tokens. It has caused tension in the cryptocurrency world as America’s eight financial regulators fight for obtaining supremacy in financial technology.

Administrative Limitations:

The lawsuit demonstrates an important administrative overreach. Individuals with a rational approach will admit that even how appealing financial technology maybe, Congress, not administrators, determine what requires a regulation. The cryptocurrency industry requests a logical structure, though Congress regrettably has spoken less regarding cryptocurrency. This act has left regulators to form their very own laws. This advancement is similar to ordinances of broadband internet, which has a transitory association in the Telecommunications Act of 1996. With no Congressional structure in position, the Obama Federal Communications Commission (FCC) strived to manage the internet with the rules intended for price control of the telephone.

Asserting that the internet is simply a continuation of the telephone network, FCC Democrats developed a policy intended to defend Silicon Valley giants in the disguise of assisting customers. The gambit issued a decade of lawsuits and impeded billions of dollars invested in novel broadband networks, stripping broadband network administrators of the capacity to reclaim costs while initiating a digital divide in provincial areas.

Concerning the Ripple Lawsuit, a republican bureau as a “deregulatory” administration implies to defend customers by challenging currency innovators.

The before-mentioned strategy is a typical indication of regulatory obsolescence and retains lawyers in a company in federal courts.

Do Administrators Protect China or US Consumers?

Though exposure is identified as a significant feature for an operating market and customer security, it is distinguishable that SEC has permitted hundreds of Chinese companies with a cumulative value of $2.2 trillion to record on US negotiations without disclosures or audits of accounts for up to two decades which jeopardized US investors.

At the beginning of this year, the bilateral US-China Commission submitted it in a report

Earlier this year the bipartisan US-China Commission submitted this in a statement to Congress and reported whence China savors the profits of America’s monetary markets, while it concurrently topples world models.

Nevertheless, it appears as if America’s nestling cryptocurrency industry was the center of Clayton’s rage, and not China’s.

During a certain event, customers are frequently attracted to Ripple and cryptocurrencies specifically to evade the costs and complications of conventional, highly-administered fiscal services, a pattern that illustrates t creativity often offers better outcomes than regulations. Furthermore, the notorious deficit expenditures by the US government reduces the value of the dollar and directs investors and customers towards more understandable, localized money like cryptocurrency.

What is the US approach for Cryptocurrencies and Blockchain?

The contradicting methods amidst US regulatory enterprises speculate the absence of an administrative framework. Though unrestricted creativity has aided innovation, administrators left that remain unaccountable will endeavor new guidelines to administer.

Previously, this strategy may have been not crucial, but now the US confronts an existential financial and security dilemma with China which is bound to replace America. Perceiving that the US has not been successful with its cryptocurrency act, China has decided to circulate its digital currency, create a blockchain ledger, and lead the technology’s application in the domestic economy.

Clayton’s displacement can reset the framework that is much required. Though the SEC Chair might acquire an erroneous trial, he does not need to implement the same flawed policies. Significantly, Congress should be formed in 2021 and initiate an appropriate framework for cryptocurrency; to assure US administration and simplify administrative boundaries.

Speaking of 2021, Jesse Hynes in a series of tweets has demonstrated facts concerning the timeline of the SEC v. Ripple case, he wrote, “Let’s briefly talk timeline for the SEC v. Ripple case (I will provide a better breakdown on Coil). A Pretrial Conference has been set with Judge Torres on February 22, 2021. The point of this conference is to determine if there is a hope of settling and discovery dates. The case will not be decided on this date. Discovery is the process by which parties learn basically everything they can about the other side’s facts. They get to request documents and take depositions (interviews). Learn about all fact witnesses and any documents, etc etc. Judge Torres generally sets a 120 day period for fact discovery (which may be shortened if there are exigent circumstances). From that 120 days period, Judge Torres then allows 45 days for Expert discovery. The final pretrial submission date is 30 days after. Then the trial is set thereafter. So, if this goes to trial, at best you are realistically looking at after195 days from February 22, 2021, which is September 5, 2021, but that is unlikely. There are always delays and consents to push back dates and extend discovery. I will be able to give you a better timeline when Judge Torres sets the discovery timeline on February 22.”

Jesse Hynes’s tweets describe the current timeline scenario for the SEC v. Ripple case.  Judge Torres has fixed a pre-trial conference with him; to ascertain concerning future dates of discovery and so that settlements can be pre-determined. He also mentions that determining the case’s conclusion on the previously specified date will not be possible.

In his tweets, he describes the process of discovery in the court of law. As stated, discovery refers to the method through which both parties can acknowledge facts about each other that can include everything. Parties are permitted to request documents and as well as to conduct interviews. Discovery allows both of the parties to learn about the witnesses and case documents presented about each other.

Moreover, Jesse Hynes tweets that Judge Torres usually sets 120 days for discovering facts; in severe cases, the Judge schedules a lesser period. From 120 days onward, Judge Torres will allow for a subsequent period of 45 days for expert discovery. Lastly, the Judge conducts a final pre-trial submission 30 days after.

Further, Jesse Hynes states that a trial sets after this. So, if we fast forward 195 days from February 22, 2021, that will be September 5, 2021. The possibility of something happening like this is unlikely as there are always unplanned delays due to consents, push back dates, and extended discovery.

Jesse Hynes concludes by stating that he will provide a better timeline for the SEC v. Ripple case as soon as Judge Torres sets a discovery timeline.

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